You’ve started a business, and now you’re wondering how to determine if you’re actually making money. It’s a fair concern. You’ve got a lot to keep track of, and while you feel like you’ve got a lot of money coming in, you’ve also got a lot going out. This is where profit margins come in. Calculating your profit margins will tell you whether the income is greater than the outgo.
But, if you’re not a math person, making those calculations is not always easy. You need to track not only your total revenue but also your cost of goods sold, which must include direct labor involved in making those goods. And that’s just your gross profit margin. There’s also operating profit, which factors in your operating costs like administrative fees and sales expenses. Then there’s your net profit margin, which considers everything, including taxes.
Is it straightforward? For the most part. Is it easy? Not always, especially if you’re not great with data, organization, and, you guessed it, math. Fortunately, you don’t have to be a numbers cruncher to calculate your business’s margins each month. There are plenty of tools out there to help you start tracking your income and outgo right now. And, ideally, over time, you’ll start to understand the numbers better and maybe teach others to do the same!
Leverage Accounting Software
The quickest and easiest way to start understanding your business’s profit margins is to leverage accounting software. You’re busy enough getting your company off the ground, focusing on products and services, and making money. You don’t want to be bogged down in paperwork, with your master calculator, multiplying and dividing when you could be hustling up more business or (imagine this) resting.
There are many options on the market today for software that will take care of the number crunching for you. No matter which software you choose, it should be able to help you track invoices and inventory, pay bills, depreciate, capitalize, and more. When trying to figure out how to calculate margin of profit on your business, pick an accounting software that will turn your raw data into real information.
Learn to Love Spreadsheets
Not ready to pick an accounting software for your business? You can start with spreadsheets! They may feel intimidating at first, but lining up all your numbers in columns can get quite addictive and fun! And it’s far better than throwing all your receipts in a drawer and throwing them at an accountant at the end of each year. There was a time when spreadsheets meant hefty, physical ledgers bound in leather that called for pencils and an abacus — but no more.
Now, you can utilize online systems like Excel through Microsoft Office or Google Sheets to not only enter your sales and expenses but also do the hard work of calculating profit margins for you. All you have to do is tell the spreadsheet what you expect of it. It will take a bit more work to understand how to input the data and communicate what you want in and from each column, but it’s a manageable system once you get the hang of it.
Try a Profit Margin Calculator
Too busy or too overwhelmed to learn how to use Excel or Google Sheets to make calculations? Try a profit margin calculator. You’ll still need to input your numbers into a spreadsheet, and you can get the values from each column easily. But instead of trying to figure out how to make column A2 subtract column B2 and then get C2 to divide A2 (Yes. It’s a lot!), you can simply add up all the numbers in your columns and insert them into an online profit margin calculator.
Like most online calculators, you can take the thinking (re: the math) out of your work almost entirely. Just Google “profit margin calculator” and you’ll get many options to choose from — most of them free. All you have to do is enter the numbers from your spreadsheet and click “calculate.” Many of these sites will also give you tips on how to make your business more efficient if your margins are low.
Hire Someone
Or forget all of the above and just hire a bookkeeper! Seriously, if you can afford it, and you’re just starting your business, finding someone to help you track your expenses and sales, calculate profit margins, and keep records of your monthly statements can take an enormous load off of all your professional responsibilities. Think about it: you’re not a bookkeeper. You may be a real estate agent, building contractor, or naturopathic herbalist.
Whatever it is you do, you expect to get paid for your specialty, and, ideally, you can pay someone else for theirs. Bookkeeping is a skill, and a good bookkeeper can save you time and money while helping you see where inefficiencies in your business lie. Some bookkeepers will also handle calls and emails from vendors and customers for you. You can pay anywhere from $15 to $100 per hour, depending on the help you require and the experience of the bookkeeper.
Make Business and Bookkeeping Part of Your Ongoing Education
Still, even if you get the best bookkeeper and accountant in the world, you should learn about your business and your books. Understanding why your business is succeeding or failing can help you ensure it sees long-term growth. Learning about your books will give you insight into the numbers in ways that will allow you to make important changes to your business. You can still hire a bookkeeper, and you should have an accountant, but also learn as you go.
Ask how they got the figures they did and why they advise you as they do. Invest in educational materials like the Bookkeeping for Dummies book. Understanding profit margins is a critical component of your company’s success. Start where you are, get the help you need, and then learn as much as you can over time. Who knows? You may find you’re a math person after all.
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